New Mortgage Rules: The Reviews Come In

The day the lending industry has been nervously anticipating has finally come.

The federal Consumer Financial Protection Bureau has rolled out new rules that reshape the U.S. mortgage industry, and are designed to ensure that lenders don’t return to the lax standards that fueled the housing market’s boom and bust.

The rules implement what seems to be a logical proposition—that lenders consider borrowers’ ability to repay the loans they are given. But given the complexity of the issue, it took months of work for the consumer bureau to arrive at a definition of a “qualified mortgage” that would meet standards spelled out in the Dodd-Frank financial law of 2010.

The consumer bureau decided that lenders could satisfy this requirement in two ways: by making loans where the borrower is spending up to 43% of their income on debt payments –or by satisfying the lending standards of Fannie MaeFreddie Mac and the Federal Housing Administration.

Some “jumbo” loans that can’t be sold to Fannie or Freddie might not be able to meet these requirements. That could dampen the availability of loans to jumbo borrowers with high debt levels, potentially putting a squeeze on sales in parts of the country where the housing market is still weak.

The rule contains key protection from consumer lawsuits sought by the lending industry. This “safe harbor” against litigation from foreclosed homeowners will only apply for loans that meet the qualified mortgage standards and are issued at interest rates that are no more than 1.5 percentage points above a national average.

Consumer advocates are unhappy with this move, as they had pushed for fewer protections from legal challenges.

Overall, the rule is a big change from last spring, when there were widespread fears in the real estate world that the rule would seriously impact the availability of loans. The rule “is far less onerous than what banks expected just six months ago,” wrote Jaret Seiberg, a senior policy analyst with Guggenheim Securities, in a note to clients.

Here’s a sampling from statements in response to the rule:

Julia Gordon, director of housing finance and policy at the Center for American Progress: “This new rule is a crucial step in protecting consumers against the predatory lending practices that crashed our housing market and stripped trillions of dollars from families. At the core of the rule lies a common-sense business principle: If a borrower can’t afford to pay back the loan in full, the lender has no business making that loan in the first place. Unfortunately, the Consumer Financial Protection Bureau shielded lenders from liability for a large subset of loans, making it more difficult for consumers to enforce this rule than was originally envisioned by lawmakers.”

Rep. Jeb Hensarling, chairman of House Financial Services Committee: “These types of ‘one size fits all’ solutions always—always—are fraught with unintended consequences. After all, government regulations and policies that strong-armed, incented and cajoled financial institutions into loaning money to people to buy homes they couldn’t afford are a major reason why we had the financial crisis to begin with. Ironically, now we have government regulations attempting to tell financial institutions not to do what the government was telling them to do before.”

Debra Still, chairman of the Mortgage Bankers Association: “This approach should allow lenders to offer sustainable mortgage credit to a great number of qualified borrowers without having to risk unreasonable and overly punitive litigation and penalties…We remain concerned that certain aspects of it could curb competition, increase costs and tighten credit availability for borrowers. In particular, the 3% cap on points and fees appears to be overly inclusive as it relates to compensation and affiliates. Loans with the same interest rate, terms and out of pocket costs should be treated the same under the rule regardless of the organizational structure or business model of the lender.”

Alys Cohen, staff attorney, National Consumer Law Center: “Congress’ mandate in Dodd-Frank is clear. Lenders must take reasonable steps to ensure that every mortgage loan is affordable when made, and homeowners whose lenders overreach have recourse. Unfortunately, and with potentially significant, negative consumer protection consequences, the Consumer Financial Protection Bureau’s new regulations fail to deliver those protections.”

Marc Savitt, president, National Association of Independent Housing Professionals: “Although the CFPB promised to create a level playing field and competition with their rules and regulations, once again we see a strong bias against licensed mortgage brokers when it comes to their ability to serve borrowers. We need a rule that treats all originators the same, instead of one that picks winners and losers.”

Gary Thomas, president, National Association of Realtors: “We are pleased that the rule encompasses the vast majority of the safe, high quality lending being done today. We will continue to work closely with the CFPB to ensure that the cap on fees doesn’t restrict consumers’ mortgage options, but believe (the) rule is a positive step to bringing certainty to the housing finance system.”